Strategic Management of TESCO Supermarket - Term Paper Example

? Strategic management of TESCO supermarket Executive summary The grocery market in the United Kingdom is experiences changes arising from business environment and increased competition. Retailers like Tesco are developing strategies that counter the internal and external market forces with an aim of remaining competitive. Responding to external pressure has caused Tesco to be innovative, diversity production and to offer competitive prices amid stiff competition. The retailer has invested in internal competencies like motivated employees and strategic management. The company is faced with challenges like overreliance on domestic market, ineffective international market strategy and changing consumer demands. The company has strategic options like developing strategic alliances with local retailers, offering cost leadership and competitive pricing. Table of Contents Strategic management of TESCO supermarket 14 1 Strategic management of TESCO supermarket 1 Executive summary 2 Table of Contents 3 Introduction 4 Business environment 5 PEST framework 5 Political factors 5 Economical factors 6 Social factors 6 Technological factors 7 Porter’s five forces 7 Threat of new entrant 7 Bargaining power of suppliers 8 Bargaining power of consumers 8 Threat of substitutes 9 Bargaining power of competitors 9 Internal analysis 9 Swot analysis 11 Challenges facing the organization 12 Strategic options 12 References 14 Introduction Food retail sector in the United Kingdom employs over 3 million people. This makes it the largest industry in the economy. However, a growing number of supermarkets are coming under intense pressure because of unprofessional treatment meted on stakeholders in the supply chain. Tesco and other supermarkets are committed to strategic development networks that lead to increased productivity. This report gives a strategic management analysis of Tesco supermarket. This includes internal and external factors that affect the retailer and the grocery sector at large. Tesco supermarket operates over 2300 stores with a total of 320,000 employees. This makes the supermarket one of the largest in the world. Through its subsidiary, the retailer offers e-services. This has expanded its scope of influence to reach consumers despite the geographic barriers. United Kingdom is Tesco’s largest market. In this market Tesco operates under Metro, Express, Extra and Superstore banners. The retailer has diversified to non-food lines e.g. clothing. Tesco delivers close to 40,000 food products. The companies label products operate at three levels. Most of the stores contain gas stations. Therefore, it has grown to become of the leading petrol retailers in Britain. Tesco personal finance is a retailing service offered by the supermarket is a bid to expand its market share. Business environment The business environment on a retailer plays a central role in its profitability. Companies are under intense pressure to acknowledge their responsibility to the society. The introduction of taxes that target the increased advertising of fatty food is bound to affect the performance of the supermarket (Stone 2009). The relationship between consumers and supplies has also been affected because of the ‘fat tax’. The presence of powerful competitors has led to intense price wars. In some instances, the foreign market environment is hostile and governments try to protect the local industries from foreign competition. Government policies that promote monopoly controls have been blamed for limited access to some markets and segments. Such policies have the capacity to reduce the buying power of consumers. Differentiation is increasingly becoming difficult because of unhealthy competition and government interference. Tesco has developed a policy in which it reduces the prices for fuel based on the amount of sales at its groceries. The retailer compensates by raising prices in other stores. PEST framework Political factors Besides the United Kingdom, Tesco operates in six countries in Europe. The legislative and political conditions of these foreign markets have a significant influence on the performance of the retailer. The policies being drafted by the European Union has a direct impact on the profitability of the company (Stone 2009). The management of the supermarket developed a policy that supports mixed employment opportunities. This targets locally based jobs to centrally located jobs. The retailer has chances for the lower and higher pain job groups. The company has a policy of employing students, elderly and the disabled. It pays them lower rates. The retail industry suffers to high rates of turnover. These special group workers offer the loyalty needed for profitability. Economical factors The forces of demands, supply, prices, profits and costs are influenced by the economic factors. High unemployment levels have been blamed for decreased demand for most goods. This has adverse effects on the demand to produce similar goods. Most of the economic factors tend to be beyond the control of the retailers. However, the factors have profound effect on the profitability and marketing mix of market players. International business is still growing and high profits are expected with time. The economic factors have caused Tesco to be over reliant of the UK market. A slowdown of the UK food market is expected to have a negative ripple effect on Tesco. The retailer is exposed to extreme market concentration risks. Social factors British consumers are shifting towards bulk shopping. Social changes are causing the one-stop approach to shopping. The company has responded by increasing the number of non-food items for sale. The demographic factors are affecting the consumer behavior in the market. UK is considered to be an aging population (Stone 2009). UK retailers are concentrating on value added services and products. This is attributed to the fact that home meal preparation is on the decrease because of the increase in female workers. The management is focusing on operational improvements, business-mix and supply chain. These aspects have the potential to affect the cost of business. Social conditioning is affects the consumer demands to particular goods and services. The attitudes and beliefs of the consumers are inspired by the prevailing societal mindset. There is a growing awareness of health issues in the United Kingdom retail market. This is affecting the demand for certain goods and services. There is an increased demand for organic products. This has caused the strategic team of the supermarket to develop a product mix that accommodates this demand. Technological factors Technology is the heart beat of the globalization phenomenon. It is also a major macro-environment variable. Technology has had a profound influence on the development process of many Tesco products. Emerging technologies are proving to be helpful to both the company and consumers. When goods and services are readily available, consumer satisfaction is high. Technology has enabled delivery of personalized services (Stone 2009). This has made shopping to be convenient and satisfying. This has caused Tesco to adopt a number of technologies. These include wireless devices, radio frequency identification, intelligent scale, self check-out machines and electronic shelf labeling. Tesco has installed electronic funds transfer at point of sale systems. This has greatly improved efficiency. The management is able to give real-time information of stakeholders leading to better delivery of goods and services. Porter’s five forces Threat of new entrant In the United Kingdom, 70 percent of the grocery market is controlled by four brands. They include Tesco, Safeway, Asda and Sainsbury. Other smaller chains control only 10 percent of the market. The large chains have built a strong reputation through enhancing efficiency, marketing-mix and promoting one-stop shopping. The grocery market in the UK is dominated by supermarkets. These factors have created barriers for new competitors targeting the grocery market. It is extremely difficult for new entrants to raise enough capital to compete with the dominant players (Stone 2009). The large fixed costs and entrenched supply chains make it even harder to new entrants to pose a credible threat in the United Kingdom grocery market. The large chains have made humongous investments in stock control systems and other technological aspects. These have impacts on new entrants. The economies of scale and differentiation achieved by the dominant players like Tesco pose a major threat to new market entrants. Better distribution techniques, product development and promotional activity by Asda and Tesco have been enhanced through decades of aggressive operational tactics. Overcoming the perceived value of the resultant products proves to be extremely difficult of new entrants. Bargaining power of suppliers Major grocery chains can influence the power of suppliers. Suppliers fear that they are likely to lose business to supermarkets. Asda and Tesco have been able to negotiate reasonable promotional prices with suppliers. The small individual chains are unable to match this. The ability of the large retailers to source products from foreign market at affordable prices is growing. This fear has caused the suppliers to act decisively to ensure self preservation. Competitive rivalry is responsible for declined profit margins for suppliers and retailers. Bargaining power of consumers According to Porter, standardized products add power to consumers. The level of product differentiation is inversely proportional to switching cost. Tesco has rolled strategic measures that have ensured consumer loyalty and retention levels remain high (Stone 2009). These include low prices, in-store promotions, customized services, and sensitivity to consumer preferences. A growing number of consumers prefer to conduct major shopping in supermarkets. This has caused supermarkets to diversify and adopt new strategic initiatives. Large supermarkets are offering banking and other social services that contribute to consumer shopping experience. Supermarkets have increased the sale of non-food items in response to the demand of consumers. Threat of substitutes Consumers are easily drawn to cheaper substitutes. This reduces demand for particular products. Smaller chains are able to offer substitutes and competitive prices. This has caused the large supermarkets like Sainsbury’s, Tesco and Asda to open stores like Metro in local towns and acquire the existing small chains. Bargaining power of competitors The large market players in the United Kingdom grocery industry appear to have ensured that competititors remain weak. This large chains like Tesco are relying on the market research indicating that consumers prefer sophisticated chains which offer consumer buying experiences or one-stop services (Stone 2009). The dominant players have refocused the value and price of their products and services to ensure that competitors offer minimal threats. The bargaining power of competitors remains weak. As a management strategic plan, Tesco has an innovative culture that develops multiple trading formats that responds to consumer behavior. Internal analysis Tesco is the leading retailers in the United Kingdom. The brand reputation of Tesco is a core competence. It offers the most competitive brand in the United Kingdom. His clarity of focus and robust strategic plans to be top level management has maintained the performance of the retailer. The company targets the entire market with different good and services. Format innovation and produce development have been the leading assets for the organization. Tesco has well targeted product offers with different offers to different segments. The management believes in competencies that can the retailer competitive and responsive to the market needs. The company has invested in trained personnel who serve with passion and dedication. The company has robust talent management systems that keep the employees motivated. The supermarket has a world class supply chain and infrastructure that has been entrenched for decades. The management has embraced technology and is committed to responding to the needs of the consumers innovatively. The manpower and technical capabilities are core competencies in the company. Swot analysis Fig 1 Tesco controls 13 percent of the retail market in the United Kingdom. The diversification of products has causing the market share to grow. The consistency in growth has become a source of consumer confidence. The geographic spread of the retailer has been of the upward trend. Introduction of online services and technological aspects have made Tesco more competitive in the domestic and foreign market. Tesco has weaknesses when it comes to unmanaged acquisitions and overreliance on domestic markets. However, the leading retailer has opportunities for growth in the diversification strategy. Tesco is offering non-food products in a bid to respond to the needs of consumers. The company operates in a few countries. Internationalization of the retailer is likely to attract growth and increased revenues. The supermarket is facing stiff competition from Wal-Mart and Asda. Other threats include falling returns in the international market and price wars that have a negative impact on the competitiveness of the retailer. Venturing into the foreign market is extremely expensive. Challenges facing the organization The retailer is expected to meet stiff competition from other internationally recognized brands like Wal-Mart. The above analysis suggests that there is an urgent need to rethink the internationalization strategy. The retailer is over relying on the domestic market while paying little investing in other potential markets across the globe. A growing number of emerging retailers are offering specialized services. This makes the Tesco to appear to have lack a line of specialization. The overall impact might be the erosion of consumer confidence with regard to expert service delivery especially on technological aspects. The declining sales in the international market are a sign that the company would be adversely affected if the consumer demand falls in the domestic market. Strategic options Tesco management should consider offering the lowest costs in the domestic market. The competitors are planning to lower costs in a bid to increase market share. Tesco is capable of controlling operating costs and determine competitive prices. The move is likely to attract huge profit margins. The management should consider pricing alternatives that gives the retailer a competitive advantage. This strategy should be accompanied by a plan to offer differentiated products and services. The company should use market research to determine the consumer expectations. Developing brand loyalty is directly related to accurate pricing and uniqueness of products and services offered. Buyers tend to have price inelasticity. Therefore, Tesco should offer attractive services that satisfy consumer expectations. Product differentiation involves customer service, technology and packaging. The management can focus on a narrow market and decide to cost leadership. This strategy involves creating internal efficiencies. These efficiencies are designed to help the retailer overcome external pressures. Tesco should develop a policy of engaging with the government, other suppliers, and stakeholders on a regular basis. This is likely to result to a better business environment for the retailer in the UK. The strategy to broaden the market demands that retailers play an active role externally. The management needs to develop a comprehensive corporate social responsibility program. This shall improve or consolidate the position of the retailer in the local communities and overall market. The plan for cost leadership includes offering certain products in confined markets. The retailer can deliver different products to different market segments demanding on the needs and expectations of consumers. This strategy is likely to counter stiff competition effectively and expand the market leadership. Building strategic international alliances is likely to overcome the challenges arising from poor performance in the foreign markets. In the Asian market, the Tesco strategic team should partner with local retailers. This can give the retailer easy access to local competencies and resources. Creating market presence in the international arena is expensive. However, the process is likely to add to the supply chain of Tesco. Successful expansion strategies often lead to growth in revenues. The management is trying to respond to the markets showing high consumer spending. Tesco can also acquire local retailers in the process on launching operations in foreign markets. References Stone, M. (2009). Managing retail customer relationships. London: Henry Stewart Talks. Read More